What Is A Stock Split And What Causes It? (2024)

Investing in stocks means you have to stay on top of how your investments are trending. When a company wants to appeal to more investors, they might issue a stock split. Here’s what a stock split is and how they matter to your investments.

What is a stock split?

A stock split is when a company divides and increases the number of shares available to buy and sell on an exchange. A stock split lowers its stock price but doesn’t weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase.

The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.

How does a stock split work?

A stock split gets issued by a company’s board of directors in an effort to become more affordable to potential investors. The announcement tends to come a few weeks before the stock split goes into effect so current investors aren’t caught off guard and potential investors can make plans to buy shares.

The type of stock split can impact the total number of shares available. For instance, if a company issues a 2/1 stock split, the value of each share is cut in half. So if you own 50 shares of a stock that trades at $50 per share, you’ll now have 100 shares that trade at $25 a share.

Types of stock split

The type of stock split matters because it can tell you how a company is performing. A regular stock split might occur when a company believes the value of the stock is too high, which means a company is performing well and is looking to increase the number of shareholders in the company.

If you are unsure about how a stock split will affect your investments, it may be helpful to consult with a financial advisor to assist you with your individual financial goals and risk tolerance through WiserAdvisor.

Reverse stock split

A regular stock splits the existing number of shares into a bigger number of shares. A reverse stock split takes a large number of shares and reduces the number. For instance, in a 1-2 reverse stock split, a stock that was trading for $10 is now worth $20 a share and if you had 10 shares, you now have five.

A reverse stock split might be made to bring up the share price and in some cases, avoid being delisted as some exchanges have a minimum share price requirement.

2/1 stock split

This common stock split is when one share is divided in half. So if you have 50 shares of a stock valued at $50 each, a 2/1 split means you’ll have 100 shares valued at $25 each. This is one of the most common stock splits.

3/1 stock split

A 3/1 stock split is when a company splits a stock three ways rather than two. So if you have 100 shares of a stock valued at $30 each, you’ll have 300 shares valued at $10 each.

Examples of a stock split

Stock splits are not uncommon. In 2022, Alphabet — the parent company of Google — had a 20-for-1 stock split. This is one of the biggest splits in recent history.

Amazon also had a 20-for-1 stock split in 2022 and GameStop had a 4-for-1 stock split. Tesla had a 3-for-1 stock split last year as well.

Why do companies split their stocks

Companies might split their stocks when they believe the share price is too high for most people. By splitting stocks and cutting the price per share, they’re opening up the opportunity for more potential investors to buy into the company.

When a company does a reverse stock split, that might be a sign of trouble. This brings the stock price back up and means there are fewer available shares for people to buy.

Pros and cons of stock splits

Pros

  • More buying opportunities. With the drop in stock price, a stock split can create more buying opportunities for potential investors. It’s more affordable to buyers who would otherwise not be able to afford it.
  • Increase awareness. There might be more attention brought to a company that wasn’t there before the announcement of the stock splitting.

Cons

  • Could become volatile. As some investors drop their shares and others start buying, stock splits can cause increased volatility. If you’re playing the long game, it’s important to remember that this is part of the risk involved in investing.
  • Doesn’t increase value. Getting more shares doesn’t mean the value of those shares increase. But if you plan to stay in it for a while, the value could increase as more investors become shareholders.

How to watch out for stock splits

Stock splits are announced a few weeks before they go into effect. You can explore stock split calendars like this one from Nasdaq. Your broker might also offer a stock split calendar so you can see what the split ratio is and when they become payable. Sometimes these are only available to account holders.

Stock splits and fractional investing

Fractional investing is when you own a portion of one singular share of a stock. How you buy a fraction of a share depends on what’s offered. You might buy up to a certain dollar amount or you can buy up to a certain amount in fractional shares.

Stock splits and fractional investing are a couple of different ways to buy into a company that’s trading at a high dollar amount that’s more than you can afford. But not every company or brokerage offers fractional investing. While you might find this offered at some brokerages, it’s not universally available and at this point.

Should you take advantage of stock splits?

You might want to think about taking advantage of stock splits if you’re interested in buying into a stock and it’s been too expensive in the past. Stock splitting shouldn’t be the main reason you buy shares of a stock, but it might be a reason to look into investing in one.

Frequently asked questions (FAQs)

Does it matter to buy before or after a stock split?

If you buy a stock before it splits, you’ll pay more per share than what it’ll cost after it splits. If you’re looking to buy into a stock at a cheaper price, you may want to wait until after the stock split.

Who benefits from a stock split?

Companies who want to expand their shareholders and potential investors both benefit from a stock split.

Are stock splits risky?

All investments are risky, but some are more risky than others. If you’re looking to buy shares in a stock, you might be taking on more risk compared to other types of investments, like index and mutual funds.

The information presented here is created independently from the TIME editorial staff. To learn more, see our About page.

What Is A Stock Split And What Causes It? (2024)

FAQs

What Is A Stock Split And What Causes It? ›

Key Takeaways. A stock split increases the number of shares outstanding by splitting each existing share into more shares. The stock price is adjusted down proportionately when a split occurs so market capitalization stays the same. Splits make stocks more affordable and can potentially increase liquidity.

What causes a stock to split? ›

When a stock price gets high, sometimes a public company will want to lower that price and can do that with a stock split. A stock split is a decision by a company's board to increase the number of outstanding shares in the company by issuing new shares to existing shareholders in a set proportion.

What is a stock split and what is the result? ›

A stock split is when a company divides and increases the number of shares available to buy and sell on an exchange. A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase.

What is a stock split quizlet? ›

Traditional stock split. A split where the value of a share and the number of shares are changed in such a proportional way that the value decreases as the number of shares increases, while the market cap remains the same.

What is the primary purpose of a stock split? ›

By splitting the stock, the company essentially lowers the price per share, making it more affordable and attractive to potential investors. The number of outstanding shares will rise due to a stock split, while the par value and market price will drop.

What is stock split in simple words? ›

A stock split is when a company's board of directors issues more shares of stock to its current shareholders without diluting the value of their stakes. A stock split increases the number of shares outstanding and lowers the individual value of each share.

What are the risks of a stock split? ›

In such a case, shareholders of the company will no longer be exclusive. Another risk of a stock split is the reduction in the face value of a share. If the company's performance plummets in the future, the face value will go down further in the market.

Is stock split good or bad? ›

A stock split won't change a company's fundamentals, but it makes shares more affordable for smaller investors. Stock splits are generally bullish—at least in the short term—but the exact reason remains something of a mystery.

Is a stock split bullish or bearish? ›

The ratio is often dependent on the price. Higher priced stocks may split enough times to get the share price below $100. Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified.

Is a stock split good or bad for a company? ›

Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices.

What is the result of a stock split quizlet? ›

When a stock splits, the share price goes down and the number of shares goes up.

Which of the following is true about a stock split? ›

The answer is d. The stockholder's percentage ownership remains unchanged. A stock split refers to the situation where the number of stocks or shares are split into more shares. For example, the outstanding shares maybe 400 million.

What is the typical reason for a stock split quizlet? ›

C. Increase stockholders' equity.

What are the pros and cons of a stock split? ›

Pros and cons of stock splits
  • Pro: Makes shares more affordable. ...
  • Pro: May trigger renewed investor interest. ...
  • Con: Could trigger volatility. ...
  • Con: Does not add any new value: At least in the short term, the total value of your assets for the stock in question remains the same.
Dec 27, 2022

What are two advantages of stock split? ›

What are the benefits of stock split? The stock split benefits are improved liquidity, reduced share price, increased accessibility for retail investors, and a potentially positive impact on market perception.

Which stock is splitting in 2024? ›

Walmart's common stock will begin trading on a post-split basis at the market open on Monday, Feb. 26, 2024, under the company's existing trading symbol “WMT.” The stock split and final ratio were approved by Walmart's board.

Is it better to buy before or after a stock split? ›

It's important to note, especially for new investors, that stock splits don't make a company's shares any better of a buy than prior to the split. Of course, the stock is then cheaper, but after a split the share of company ownership is less than pre-split.

Is stock split a good thing? ›

A stock split is neither inherently good nor bad. Again, after the split itself your position as an investor remains unchanged. You own a different number of shares, but the value of your investment remains the same. However, stock splits often do lead to portfolio growth.

Do stocks do better after a split? ›

Splitting the stock brings the share price down to a more attractive level. The actual value of the company doesn't change but the lower stock price may affect the way the stock is perceived and this can entice new investors.

Should you sell before a stock split? ›

Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified. Investors who own a stock that splits may not make a lot of money immediately, but they shouldn't sell the stock since the split is likely a positive sign.

Top Articles
Latest Posts
Article information

Author: Manual Maggio

Last Updated:

Views: 5483

Rating: 4.9 / 5 (49 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Manual Maggio

Birthday: 1998-01-20

Address: 359 Kelvin Stream, Lake Eldonview, MT 33517-1242

Phone: +577037762465

Job: Product Hospitality Supervisor

Hobby: Gardening, Web surfing, Video gaming, Amateur radio, Flag Football, Reading, Table tennis

Introduction: My name is Manual Maggio, I am a thankful, tender, adventurous, delightful, fantastic, proud, graceful person who loves writing and wants to share my knowledge and understanding with you.